Because you will not pay additional trading costs when JPMS is the broker-dealer that executes a trade order in your Wrap Fee Program account, Investment Managers may determine that JPMS’s execution capabilities as broker-dealer provide the most favorable option for placing trade orders in your account. However, as noted above, an Investment Manager may choose to trade away if such Investment Manager reasonably believes that another broker-dealer will provide a more favorable execution under the circumstances, notwithstanding any additional costs that you may incur.
When an Investment Manager trades away, the trades are executed at a broker-dealer other than JPMS and are cleared and settled at JPMS. If an Investment Manager executes trade orders with a broker-dealer other than JPMS, you may incur trading costs in addition to the fees charged by JPMS for your participation in the Wrap Fee Program. The broker-dealer executing the trade-away transaction may charge fees that may include commissions, markups, markdowns or “spreads” paid to market makers, which will be borne by you. Additionally, if a foreign currency transaction is required, a foreign broker-dealer may receive compensation in the form of a dealer spread, markup or markdown. There may be other exchange or similar fees charged by third parties, including but not limited to those relating to foreign currency conversion, creation of American Depositary Receipts (“ADRs”), and foreign tax charges. Ordinarily, you will not be able to tell by looking at your trade confirmation or account statement whether you incurred additional costs (or the amount of any such costs) in connection with trading away by an Investment Manager, because any such costs are typically not identified separately on such documents but instead are generally incorporated into the net price of the trade.
Depending on the types of securities traded in a portfolio in the Wrap Fee Programs, certain Investment Managers may place all or substantially all of certain types of trades with another broker-dealer for execution. In the context of wrap fee programs generally, for example, it is not uncommon for investment managers to trade away in fixed income, foreign security, and small-cap equity strategies. In a wrap fee program, therefore, such types of securities could be more costly to you than other types of strategies in which investment managers may more commonly place trades with the sponsoring broker-dealer for execution.
You should note in particular that JPMS does not accept fixed income trades for execution in the Wrap Fee Programs. Because of this, when an Investment Manager that participates in a Wrap Fee Program wants to place a trade in a fixed income security, like a bond, note, or debenture, such Investment Manager will have to trade away, even if it would have preferred to use JPMS to execute the trade. Accordingly, you should expect that all fixed income trades in your account(s) in the Wrap Fee Programs will be executed by broker-dealers other than JPMS and that you may incur transactional costs in connection with the trades that are not covered by the wrap fee you pay to JPMS.
Fixed income securities are primarily traded in dealer markets. These securities are directly purchased from or sold to a financial services firm acting as a dealer (or principal). A dealer executing such trades may include a commission, a markup (on securities it sells), a markdown (on securities it buys) or a spread (the difference between the price it will buy or “bid” for the security and the price at which it will sell or “ask” for the security) in the net price at which transactions are executed. The bid and ask are prices quoted by the dealer, so you should understand that a dealer’s bid price would be the price at which a client is selling their security, and the dealer’s ask price would be the price at which a client is buying the security.
You should review an Investment Manager’s Form ADV Part 2A Brochure, ask about an Investment Manager’s trading practices, and consider that information carefully before selecting an Investment Manager and its investment strategy. In particular, you should carefully consider any additional trading costs associated with a particular Investment Manager and investment strategy before selecting them for your Wrap Fee Program account.